Global microscope on the microfi nance
business environment 2010
In focus
© Economist Intelligence Unit Limited 2010
62
Microfi nance credit reporting
Extreme responses, such as the revolts in Karnataka, the No Pago movement in Nicaragua, and regulatory
restrictions on MFI lending, do not address the underlying issues that create conditions for over-
indebtedness. In a market devoid of information-sharing, MFI lenders do not have the ability to identify
customers that borrow from multiple sources, nor do they have a view of the overall level of indebtedness
of their existing or potential clients. This information asymmetry characterises most principal-agent
relationships, and its effects are now being felt in the microfi nance sector. As long as the economy is
doing well and most people are gainfully employed, multiple borrowing is not a problem; loans are
generally paid on time, keeping non-payment rates low and microfi nance portfolios strong. But when a
business-sector slump leads to job losses and a decline in wages, borrowers often have little choice but
to default. The inability to identify and curb indebtedness increases the risk of non-repayments, non-
performing loans (NPLs) and deteriorating portfolios.
The fundamental case for credit reporting in microfi nance is to alleviate the credit risk arising from
information asymmetries. This is where credit bureaus come in. A credit bureau collects information
from lenders and available public sources on a borrower’s credit history. Information on individuals and
small fi rms is compiled into a comprehensive credit report that is then sold to creditors. Credit bureaus
typically support the retail lending business by providing objective information on the creditworthiness
of individual customers or small businesses. They allow lenders to make faster and more accurate
credit decisions, thereby lowering default rates by 30-40% and increasing lending volumes.
5
While
credit reporting for retail and small business lending has evolved over the past century, uptake in the
microfi nance sector has been relatively slow.
Experience from Ecuador shows that credit reporting allows MFIs to monitor the portfolios of existing
borrowers, assess their overall level of indebtedness, and make more informed lending decisions. This
may involve renewing a credit line, denying an existing borrower more credit, devising fl exible pricing
based on borrower credit histories and repayment characteristics, or developing fl exible product terms to
better suit the borrower’s capacity to repay. In India, for example, the largest MFIs participate in a credit
reporting system (under development) and use shared information to identify borrowers with multiple
loans, capping the maximum exposure per borrower at Rs50,000 (around US$1,000) at any given time.
6
Credit reporting can also have a disciplinary effect on borrowers.
7
One study showed that educating
borrowers of a major MFI in Guatemala about the existence and use of a credit bureau improved borrower
repayment rates.
8
Credit reporting clearly has benefi ts for MFI lenders, and could lead to cost savings and operational
effi ciencies that have been demonstrated at regular fi nancial institutions. Even so, implementing
microfi nance credit-reporting systems is challenging. Fundamentally, many MFIs are simply unaware
of the potential benefi ts of credit reporting and how it can support their operations. Moreover, many
MFI lenders are wary of “information-sharing mechanisms,” both within and outside of their niche.
In addition to issues of awareness and trust, several technical challenges impede the development of
microfi nance credit reporting. These include equipping MFIs with the right mix of technology and skills
to capture borrower data and transmit such data to a credit bureau, and training MFIs to use information
from the credit bureau in their lending processes.
5. Barron, J. M. and Staten,
M. (2003), “The Value of
Comprehensive Credit
Reports: Lessons from the U.S.
Experience”, in Credit Reporting
Systems and the International
Economy, MIT Press.
6. Ng, J. (April 2010),
“A Detailed overview of
Microfinance Institutions
Network (MFIN)”, Microfinance
Focus online. Available at:
www.microfinancefocus.
com/news/2010/04/24/special-
report-a-detail-overview-of-
microfinance-institutions-
network-mfin/
7. Padilla, J. A., and Pagano,
M. (July 1999), Sharing Default
Information as a Borrower
Discipline Device, Centre for
Studies in Economics and
Finance, Working Paper no. 21.
8. De Janvry, A., McIntosh, C. and
Sadoulet, E. (June 2007), “The
Supply and Demand Side Impacts
of Credit Market Information”,
in Journal of Development
Economics, Volume 93, Issue 2.